Economics: The Growth Curve

Scotia

Exports of our region’s vehicles and parts are growing at a faster pace than global auto industry exports overall, and North America is in a much stronger competitive position than during the last decade, when it consistently lagged behind its global peers.
(Photo: Scotia Bank)

The North American auto industry is in high gear. We’re competitive and likely to remain that way.

All year long we’ve been talking about record sales, and while of course nothing lasts forever, we’re still on track and the high points have surprised us again. The Canadian industry set another all-time sales record in October and it’s all going above what we expected.

This reflects the fact that, notwithstanding the problems in the oil and gas sector, the Canadian economy is starting to bounce back. We’re seeing job growth pick up significantly. During October, we saw 44,000 new jobs created in this country in that month alone, and averaging out the year to that point, we’re seeing about 17,000 jobs created each month. That’s well above the 10,000 jobs per month we were creating in 2014, and it’s indicative of a strengthening economy despite what we’re seeing in many industries.

Exports are up

Most notably, the manufacturing side in Canada is bouncing back nicely. Our exports to the U.S. are up in double digits this year, the first double-digit increase we’ve had since the global economic expansion began in 2010. We’re also seeing the U.S. economy gaining some strength and expect even more increases in the future, and that’s helping manufacturing here, along with the reduced value of the Canadian dollar.

Consistent with the improving economic conditions across North America, the auto industry is doing quite well in employment, growing in excess of 5 percent year-over-year. Just as importantly, we’re seeing that the North American auto sector has been gaining market share globally. Exports of our region’s vehicles and parts are growing at a faster pace than global auto industry exports overall, and North America is in a much stronger competitive position than during the last decade, when it consistently lagged behind its global peers.

Mexico is responsible for a lot of that growth, but that still works to our advantage in Canada. The North American auto industry has the most highly-integrated supply chain network in the world. More than 96 percent of Canada’s automotive exports go straight to the other two NAFTA countries. If NAFTA is doing well overall, it boosts our economic activity here in Canada.

The Trans-Pacific Partnership

Many people are concerned about the Trans-Pacific Partnership (TPP) and what could happen if it is implemented, but it’s not all doom and gloom. Many of the concerns have to do with the potential dislocation of sourcing patterns for vehicles and parts. The TPP would provide our North American auto industry with preferential access to rapidly growing markets in Asia and South America, but it reduces the rules of origin requirements for vehicles and parts.

The new rules would reduce the local vehicle content requirement from 62.5 percent North American content to about 45 percent from anywhere within the TPP region. That is significant and has led to worries about everything being produced outside of North America in the future, but we took a look at trade flows.

Even with high tariff barriers in some of the countries involved in the TPP, North America’s industries have been able to make solid inroads into them. Vehicles and auto parts going from the NAFTA region into Trans-Pacific Partnership member nations, especially those with emerging markets, have increased by 8 percent per year over the past five years, roughly double the pace of volume growth in North America’s mature market.

Well above the minimum standards

We also looked at what’s being produced. Under NAFTA, each part has to have about 60 percent North American content, but currently, 75 percent of all parts in the NAFTA region are made in North America. That’s well above the minimum threshold and that’s indicative of the competitiveness of the sector. It’s significantly higher than what is required, so even if the standard is reduced to the expected 40 percent, it’s doubtful we’d see the actual content drop to that minimum. It’s important to remember our competitiveness, because one of the things going on in the press is the fear that these units will be made in lower-cost jurisdictions.

And all of this is predicated on the TPP actually passing. The twelve countries involved have initially agreed on it, but it has to be approved and ratified by the governments of all twelve. There’s no timeline on when the TPP will pass, if at all.

Worldwide, we’re seeing global car sales gain momentum, climbing 3 percent in September 2015 over the same month a year prior. The improvement was led by North America and Western Europe, as well as a rebound in China after three consecutive months of declining volumes.

In the U.S., sales in September and October represented the best back-to-back monthly performance since early 2000, when the global economy was still in the midst of its tech boom. Crossover utility vehicles were the big leaders in the United States, rising 32 percent year-over-year and now making up a record 31 percent of the U.S. passenger vehicle market.

All of this, overall, is good news for auto dealers, as growth and record sales are likely to continue. Looking at the automotive sector as a whole, it’s more competitive than many people think.

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